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Salt Foods purchases seventy $1000, 5%, 10 year bonds issued by Pretzelmania, Inc., for $75,723. The...

Salt Foods purchases seventy $1000, 5%, 10 year bonds issued by Pretzelmania, Inc., for $75,723. The market interest rate for bonds of similar risk and maturity is 4%. Salt Foods receives interest semiannually on June 30 and December 31.
Record the investment in bonds on Jan 1.
Record the receipt of the first payment of interest on June 30.

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Expert Solution

Answer
Req- 1      Record the investment in bonds on Jan 1.
The follwing accounting equation for the entry
Assets = Liabilities + Stockholders equity
$( 75,723 ) Cash
$ 75,723 Investment  
Date Account Title Debit credit
Investment   $ 75723
       Cash $ 75723
( To recied the purchased Bonds )
Req-2       Record the receipt of the first payment of interest on June 30
The follwing accounting equation for the entry
Assets = Liabilities + Stockholders equity
$+ 1,750 Cash = +$1514.46 (interest revenue )  
(235.54 ) inevestment
Date Account Title Debit credit
Jun-30 Cash $ 1750
     Investment ( diff ) $ 235.54
     Interest revenue
( To receord the semi annual interest )
WORKING NOTE
Calculation Of Cash Received
Cash Received =Face value * Stated interest rate *time
70000*5%*1/2
$ 1750
Calculation Of interest revenue
Interest revenue = carrying value * market interest rate * time
75723*4%*1/2
$ 1514.46

ekkarill92 answered 2 years ago
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